Exam (elaborations)
LML4806 - Company Law
- Institution
- University Of South Africa (Unisa)
Model Questions & answers for LML4806 - Company Law: Would be of great help with exam prep
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Question 1Lesego is a director of One Stop Groceries (Pty) Ltd. When the company needed to appoint a
new marketing agent to advertise its products in Gauteng, Lesego persuaded the board to
appoint ‘The Best CC’ by convincing them that The Best CC would be ideal for this task.
However, Lesego did not disclose the fact that his brother had a substantial member’s
interest in The Best CC. The Best CC was appointed, but a few months later it became clear
that One Stop Groceries (Pty) had suffered substantial losses in Gauteng because its products
were not being advertised effectively, since The Best CC had no experience in this type of
work. A number of shareholders in One Stop Groceries (Pty) ltd now want to hold the
company’s directors liable for breach of their duty to act in the best interest of the company
and their duty to care, skill and diligence by appointing an inexperienced close corporation
as their marketing agent.
Advise Lesego and the other directors of One Stop Groceries (Pty) Ltd on whether they can
escape liability on the basis of the business judgment rule.
Duties as Directors
Section 76 requires a director to act in good faith and in the best interest of the company1. A
director should act with the degree of care, skill and diligence that may reasonably be
expected of a person carrying out such functions and having the same skill and experience of
that director – the reasonable man/woman test.
Directors are required to disclose any “personal financial interest”. They may not use their
position as director or information gained as a director to make a secret profit or gain
advantage for themselves or someone else or to cause hare or detriment to the company.2
Business judgment rule
According to the business judgment rule (section 76(4)), the director will be regarded as
having acted in the best interest of the company and with the required degree of care, skill
and diligence if the director:
- Took reasonable steps to become informed about the matter;
- had no material personal financial interest in the subject matter of the decision or
had no reasonable basis to know that any related person had a personal financial
interest in the matter, or disclosed his/her interest;
- made or supported a decision in the belief that it was in the best interest of the
company.
A director will also escape liability where he or she had a rational basis for believing, and
actually believed that the decision was in the best interest of the company3.
1
Companies and other Business Structures in South Africa, Davis D, Geach W, Mongalo T, Butler D, Loubser A,
1
Coetzee L and Burdette D, page 108
2
The Companies Act, no 71 of 2008, an explanatory guide, DTI
3
Learning Unit 3, UNISA, provisions of the Companies Act.
Page 1 of 19
,Application of facts and conclusion
As Lesego and his brother are related persons, it is clear that Lesego had a material personal
interest in the appointment of The Best CC. The other members of the board relied upon the
information that Lesego gave them, and had a rational belief that the decision was in the best
interest of the company.
Accordingly, as Lesego did not disclose his interest, he cannot rely upon the business
judgment. The other members of the board, acting in good faith, may rely upon the business
judgment rule.
Question 2
The board of directors of Green Fields Ltd (‘the company’) approaches you for advice. The
board has resolved to issue shares to the following persons:
the newly appointed chief executive officer of the company;
a new director, Mr Brown, who will be joining the board of directors in three months’
time; and
certain employees of the company in terms of an employee share scheme.
However, the board of directors is uncertain whether approval from the shareholders of the
company is required to issue these shares. The board is further unsure about how the
payment for these shares is to be determined. The board is particularly concerned about the
consequences if they do not comply with the requirements of the Companies Act. Advise the
board of directors of Green Fields Ltd on the above matters. Refer to particular sections of
the Companies Act where applicable.
The issue of shares relates to section 41 of the Act.
The Companies Act regards the decision to issue shares as a management decision, i.e the
board of directors have the power to issue shares without the approval of the shareholders,
unless the Memorandum of Incorporation (“MOI”) imposes specific limitations.
The board will however need shareholder approval when the issue of shares is to:
A special resolution is requires when shares are issued to:
1- where the shares are issued to directors (including future directors), or to certain
prescribed officers of the company;
2 – where the shares are issued to a person related or inter-related to the company or a
director or prescribed officer of the company;
3 – where the shares are issued to a nominee of a director or prescribed officer of the
company4.
An ordinary resolution is required when shares are issued to:
1 – Under an agreement underwriting the shares;
4
Companies and other Business Structures in South Africa, Davis D, Geach W, Mongalo T, Butler D, Loubser A,
Coetzee L and Burdette D
Page 2 of 19
, 2 – in the exercise of a pre-emptive right to be offered and to subscribe shares;
3 – In proportion to existing holdings, and on the same terms and conditions as have been
offered to all the shareholders of the company or to all the shareholders of the class or
classes of shares being issued;
4 – pursuant to an employee share scheme; or
5 – pursuant to an offer to the public5.
The board of directors also has the authority to increase the authorized shares of the
company6. Section 40 provides that the board may only issue shares for adequate
consideration. The board must determine what an adequate consideration for the shares
would be7.
Shares may also be issued in exchange for future services or payments. When shares are
issued for future services or future payment, the shares must be issued immediately and
should be held in trust until the future obligations are fulfilled8.
Where the voting power of a class of shares that is to be issued is equal to or exceeds 30% of
the total voting power of all the shares of that class held by shareholders immediately before
the transaction or series of transactions, a special resolution by all the shareholders is
required9.
As per Section 44 of the Act, to the extent that the MOI provides otherwise, the board may
authorize the company to provide financial assistance by way of a loan, guarantee, the
provision of security or otherwise to any person for the purposes of any securities of the
company, should certain conditions be complied with.10
Application of facts and conclusion
In this particular instance, Green Fields Ltd will need to obtain shareholder approval for the
issue of shares, via a special resolution for the issuance of the shares to the newly appointed
chief executive officer of the company and for the new director. Approval by means of an
ordinary resolution is required for the issue of the shares to certain employees of the
company in terms of an employee share scheme.
The shares need to be issued for adequate consideration. The board must determine what an
adequate consideration for the shares would be. The board may authorize the company to
provide financial assistance to the receivers of the shares, if necessary, should conditions be
complied with in terms of section 44 of the Act.
5
Companies and other Business Structures in South Africa, Davis D, Geach W, Mongalo T, Butler D, Loubser A,
Coetzee L and Burdette D
6
Learning Unit 5, UNISA, provisions of the Companies Act
7
Learning Unit 5, UNISA, provisions of the Companies Act
8
Learning Unit 5, UNISA, provisions of the Companies Act
9
Learning Unit 5, UNISA, provisions of the Companies Act
10
Companies and other Business Structures in South Africa, Davis D, Geach W, Mongalo T, Butler D, Loubser A,
Coetzee L and Burdette D
Page 3 of 19
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